Economic History pt II PDF

INTERWAR WORLD ECONOMY The long 19th century: 1789 to 1913 century of modernisation and globalisation —> political rev, industrial rev, transport rev, communication rev + global trade btw core and periphery, global capital ows and mass migration, international gold standar...

INTERWAR WORLD ECONOMY The long 19th century: 1789 to 1913 century of modernisation and globalisation —> political rev, industrial rev, transport rev, communication rev + global trade btw core and periphery, global capital ows and mass migration, international gold standard, liberal international order 20th century was primary of con icts. Churchill de ned it as the “2nd 30 Years War” ○ WWI and WWII, European civil war (1917-1949), Cold War (1949-1989) 20th was also a century of calamities: wars, revolutions, econ. crises, global pandemic During 20th century, there was also the de-globalisation and de-colonisation (no more empires) WWI (1914-1918) was a global armed con ict, but fought primarily on eu soil + colonies. Biggest war ever made before. It was the end of the “long” 19th century, so a watershed in human history with global repercussions on economy, politic, society and culture ○ Economic consequences: human casualties, disruption of global trade, crisis of global nance, peace settlements with borders redrawn and war reparations Very important to consider the Spanish u (1918-1920)—> pandemic caused by H1N1 A virus, 500 mln infected in 3 worldwide waves with 30 to 100 mln deaths ○ Called Spanish Flu bcs Spain was the only nation that could talk about that for the censorship during WWI ○ Contagion spread by allied armies and naval forces ○ Mass mobilisation, however, increased state capacity GLOBALISATION BACKSLASH= even though transport and communication continued to improve, born hostile international relations that Outweighed technological progress (tariffs and non tariff barriers + immigration limitation, collapse of gold standard in 1930s) —> decline of global trade, US dominant in econ [no more Europe], end of mass migration and large capital ows WWI put end to migration, but also restrictive immigration policies. The remaining migration was usually forced: eeing wars or authoritarian regimes or ethnic minorities US was the rst to shut out migrants: rst Asians, then introduced literacy test, then introduced quotas on national origin from 1920s (S-E EU) After US, reduction of immigrants spread elsewhere [Argentina, Australia…] fi fi fl fl fl fl fi fl fl fi  Mass unemployment was largely unknown before 1914: before WWI was of shorter duration and cyclical —> then, sustained level in 1920s and very high in 1930s Why was so high? ○ Classical view: labour markets are exible, unemployment mostly voluntary and so Fiscal Policy isn’t needed to create employment ◆ wages and prices are exible ◆ Supply and demand of labour determine the eq price of labour and qty supplied ◆ Everyone is looking for a job paid at eq wage gets one ◆ Unemployed are who nd eq wage is too low ○ Keynesian view: “sticky wages” (downward wage adjustment is dif cult when prices fall -> workers have more political power through also labour Unions), unemployment is involuntary, gov needs to boost aggregate demand ○ Historical evidence makes dif cult to reconcile the theory of voluntary unemployment ○ Neo-liberal view: some countries had unemployment bene ts (UK the Unemp Insurance of 1920 covered 11 mln people) —> Voluntary Army enjoyed bene ts while being unemployed 1925 UK returned to Gold Standard at pre-war parity (exchange rate was not adjusted for wartime in ation) + US reinstated pre-war parity but after less wartime in ation + other countries returned to gold after devaluation KEYNES= the overvalued sterling made British goods more expensive ○ British industry less competitive -> rise imports + fall exports ○ Fall in aggregate demand (C+I+G-IM+EX) -> fall domestic prices (de ation) ○ Wages could not adjust enough to falling prices DEFLATION -> HIGHER REAL WAGES -> LOWER DEMAND FOR LABOUR Productivity of those who worked continued to increase (improv human capital and tech.) Growth after 1900 brought by new ind technologies -> more capital and knowledge intensive -> industrialised countries rich in capital and human capital grew faster “No longer London, not yet Washington” Lack of leadership led to situa where consensus could not be reached. No country willing to restabilise the global monetary environment. Lack of leadership was compounded by absence of international coop btw * US UK FR GER -> central problem for the entire period + unwillingness of CBs to operate the GS Inability described by the World Monetary Conference in 1933 in London, after US abbaondoned GS Io fl fi fl fi fl  EUROPE AFTER WWI The Great War was a “war of attrition”: manpower still mattered for military outcomes but industrial potential and transport capacity mattered more Divided btw the front of Battle eld and the Home Front (economy was mobilised for war) Even if US entered the war in 1917, had always sustained Europe with materials —> GDP of US increased btw 1914 and 1919 (also debt increased by 30%, but is not that big if compared to European debt of FR GB and IT) Gov controlled allocation of supplies, labour, investment Gov did that bcs of the Home Front: reimagine the econ ○ Germany created “War Raw Material Of ce” under The Economist Rathenau to control supplies ○ Italy had joint councils of industrial/militar leaders ○ UK “Ministry of Munitions” under Lloyd George Economic impact of WW can be easily understood through The study of reallocation of resources: ○ Labour transferred into armed forces and in munitions industries (mining, chem…) -> chosen very young males that were not really employed (from farms, light manufacturing or on industries not fundamental), which led to a high labour shortage. The shortage brought more work to women and even children (some restraints were abolished temporarily over minor labour) ○ Capital was directed towards war effort: Big nations borrowed from themselves, more money where printed, borrowings from consumers, war bonds (no dividends during war but after ONLY in case of victory) ○ Reorganisation of industries: mass production in large factories at expense of smalls ○ Acceleration of technical progress in chemicals and machinery With WWI, there were two exogenous shocks: 1. MOBILISATION= from civilian to war production 2. DEMOBILISATION= from war to peacetime economy (very dif cult) There was also persistent effects like gov regulation as before WWI dif cult to restore and international nance based on the gold standard almost impossible to recreate Markets, at least, were controlled by the government fi fi fi  Gov directly controlled prices, production, labour allocation —> some persisted even after WWI fortunately, but misallocation of resources creates vested interest in keeping the big ow of resources in that sector ECONOMIC WARFARE= limit economic potential of the rival (GB with naval block of GER) (submarine war) —> in WWI led to collapse of international trade War caused disruption even in independent nations of the periphery ○ Periphery used to import manufacture, but Core started to produce for war and stopped the export -> needed a new industry in periphery and, after WWI, they wanted to protect the new manufacturing industry ○ Huge export of food stimulated the over production in primary goods. But when Europeans after war returned home, export decreased -> agricultural crisis 1920s ○ Collapse of foreign investment -> need state intervention STRUCTURAL IMBALANCES= after WWI, the big new capacity brought by war became super uous -> overproduction of capital goods, shortage of consumer goods A consequence of the structural imbalances was the high rate of unemployment, since labourers were not needed anymore in such a quantity Government intervention + in ation (extensive borrowing and huge note issue) + fragile international monetary system (delayed return to Gold Standard) Through gov intervention, for the Phillips Curve [negative relation btw in ation and employment], in ation could have been adjusted without worrying about unemployment —> in reality it was very dif cult bcs gov itself was feeding in ation Dif cult to return to peacetime governance, since during WWI almost 30-50% of nation’s GDP was controlled by the state VESTED INTEREST= rms and unions sought to maintain their privileges, resisting to reforms and changes —> priority to their bene t over the society ones Social unrest due to deep recession btw 1920-21 (unemployment + in ation brought savings to become worthless) and the rise of working class (Russian revolution) The Peace Treaties had 2 consequences: ○ Disintegration of states with the redrawn of political map of central and eastern EU ○ Destabilisation bcs treaties required enormous reparation burden to GER —> primary cause of antagonism and economic discord fl fl fi fl fi fi fl fi  Creation of new nations with nationalist ideology disrupted production networks and limited the market access —> new borders determined by national self-determination, not by economics ○ quest for ethno-linguistic homogeneity disrupted trade networks ○ New borders were imperfect: large ethnic minorities were left behind new borders All of that brought to Separatism and Revisionism Creation of new currencies, tariffs to protect national industries and independent scal and monetary policies. However, no effective coordination and regional division of labour + small markets undermined the overall industrial progress Most controversial issue in the peace with GER was Reparations! Reparation because with Versailles Treaty GER was held responsible for war -> GER was supposed to cover all war-related material damage (not clear the qty) Reparations were the key to political and economic crisis of interwar period Keynes condemned reparations bcs economically illogical and political unwise: Eu welfare was based on GER + dif cult transfer real resources btw countries for the uncertainty in the international market GER stripped of gold reserves, most of merchant navy and large stock of transport equipment GER failure to deliver reparation: Allies occupied border cities in 1921, then occupation of Ruhr in 1923, where workers activated a passive resistance (general strike) —> economic collapse and hyperin ation During WWI, US became main creditor. In 1919, recalled war debts: Eu countries could only repay them if GER delivered the reparations, but GER depended on ability to generate export and thus obtain gold -> restrictions imposed by allies on GER diminished GER export and industrial potential = CIRCLE OF DEBT Dawes Plan in 1924 solved the reparations dilemma, with US giving initial kick-start 1925-1929 GER managed to pay, BUT not because of Dawes Plan but because borrowed from US capital markets (alimented the circle of debt) Wartime in ation + immediately after armistice some commodities price fell, but in ation resumed soon afterwards 3 trends: hyperin ation (GER) / high persistent in ation (FR) / high in ation eventually controlled (UK and neutrals) Germany experienced hyperinflation in the early 1920s (especially in 1923) due to the economic strain from World War I and the Treaty of Versailles, which required Germany to pay massive reparations. The fl fl fl fi fl  GREAT DEPRESSION Most severe economic downturn of the modern era Not caused by a huge event like WW or a pandemic and was responsible for great deal in political aspect btw nations Nowadays markets are based on the study of the errors of the GD Began with a stock market crash in NY Global Contraction (1929-1932): huge drop in industrial production, steep decline in prices (de ation), unprecedented lvl of unemployment (disruption of the Phillips Curve theory), collapse of internal trade 24 October and 29 October 1929 were the two crashes of stocks —> Black Tuesday was the most important and impacting ○ There was a bubble on stocks that caused then the fall of it. However, when fall reached the value of stocks before the bubble, it had a small period of increase During Global Contraction, world manufacturing production fell by 36% [severe in US and GER, while milder in JAP, SCAND and UK] In US depression was deeper and longer than in elsewhere. The domestic nancial crisis led to industrial depression —> some nations in EU were hit hard by the ind depr of US, since US was very important in their economy (GER, AUS, BEL) Industrial depression led to banking and currency crises In other countries in EU the recession was more moderate but still important. However, the banking system remained relatively stable The periphery was hit by the huge decrease in export prices, creating currency crises and balance of payment problems US Banking Crisis: ○ Stock market crash of 1929 reduced investors’ con dence, real estate market collapsed in the large cities and banks most active in mortgage lending failed (Bank of US in dec 1930 and Chicago and NY banks in 1931/2) ○ Run at the banks: withdrawal of deposits reduced money supply + banks failures raised the cost of nancial intermediation but decreased prices (bcs fall of supply) ◆ If money supply falls, less purchasing power, less demand and investment ○ Macroeconomic shocks fl fi fi  MONETARIST VIEW= their theory was that large variations in money stock have large effect on prices and output ○ Friedman Rule: CBs should target a (small) constant rate of growth in the money supply ○ FED deviated from the Friedman rule during Depression: tightened money supply when it should have raised liquidity —> supply fall by 30% btw 1929-33 Termin in 1976 said that monetary forces was not the main cause of the GD. The decline in the money stock was a consequence, not a cause, of GD. ○ [M0= coin + notes + CB credit - M1= M0 + commercial bank deposit … usually the money supply ALWAYS refers to M1] ○ During a crisis, money are moved from M1 to safer assets: withdraw from banks and put somewhere else ○ Fall in output -> lower demand for money -> decline money stock ○ Banks did not fail bcs they were illiquid but bcs they were insolvent (bad loans, especially mortgages from 20s) [enough liquidity but liabilities too high wrt assets] ◆ providing liquidity would not have helped However, Friedman missed the international POV: very important in the GD In Central Europe, there was a “twin crisis” -> failure of large banks provoked a banks run + currency crisis and loss of gold reserves The largest bank in Vienna crashed in April 1931, exposing the risk of industrial lending by big German banks —> CONTAGION Germany intervened leaving effectively the gold standard in august 1931 bcs suspended the gold exchange with the other counties GER, AUS, HUN limited foreign exchange and monitored foreign loans to stop the out ow of gold STERLING CRISIS= there was further contagion, since German suspension of gold standard put pression on the £ -> insuf cient gold reserves created a run on the Bank of England and gold standard suspended on 20/09/1931 ○ Balance of payments of UK changed. Before WWI had a large current account surplus that was balanced by the capital account de cit, due to continue investment. During GD, current account de cit (due to trade de cit due to strong pound + liquidation of overseas assets during WWI) and capital account surplus fi fi fi fi  ○ Capital account surplus due to big long term liabilities offset by short term credit ◆ UK extremely dependent on world trade and growth in the periphery There was a new macroeconomic policy after 1931: expansion of liquidity through the lower interest rate + introduced General Tariffs De ation was GLOBAL -> monetary contraction in all countries But why monetary policy so similar everywhere? Gold Standard both deepened and Caused the GD —> malfunctioning of GS promoted de ation around the world + during depression, monetary and scal policy pushed for austerity instead of expanding aggregate demand. The recovery started when Uk and then US exit the GS GS before 1914: 1. Sterling “just as good as gold”, no actual exchange and shipment of gold 2. Gold production grew rapidly, mostly from UK dominions, supporting steady increase in the global money supply 3. UK huge current account but exported capital 4. Major CBs cooperated to avoid running out of reserves GS in 1920s: 1. US had huge current account surplus but sterilised it 2. Accumulation of gold reserves in US and FR caused shortage of credit in world economy -> no effective gold-exchange system 3. CBs did not cooperated to alleviate gold hunger The problem was: 1. INCORRECT EXCHANGE RATES= US returned to gold in 1919 at pre war rate despite WWI in ation -> insuf cient gold cover -> FED sterilised current account surplus. Other countries returned on gold or too high (UK) or too low (FR) parities, leading to high trade imbalance 2. MISALLOCATION ON GOLD= theorised by Bernanke and Eichengreen. FED and bank of France sterilised gold in ow to prevent in ation and were not penalised even if they broke the “rules of the game”. High US tariffs led other countries to current accounts de cits —> de cit countries had 1 solution to maintain gold parity: INFLATION fl fl fl fi fi fi fl  Fixed exchange rate systems face a trilemma. However, macroeconomic policy can include only two elements of the trinity: 1. Full capital mobility 2. Fixed exchange rate 3. Independent monetary policy First two, for example, were at the base of Gold Standard (and then eurozone) Solution to exit the trilemma was to restore independent monetary policy! ○ UK and Sterling Bloc abandoned gold in 1931 ○ GER and central EU implemented capital control ○ FR and Gold Bloc: absence of devaluation led to high tariffs Positive effects of devaluation were that: gov could boost aggregate demand, competitiveness was increased and CBs could act as “lender of last resort” BUT UK devaluation hurt other countries’ balance of payments, that had to keep their balance of payment in equilibrium —> restriction on imports increased tariffs rates and led to import quotas and exchange restrictions Gold Bloc (ITA, FR, BEL) countries increased tariffs more than others! Global protectionism prevented recovery of world trade SPAIN= it was only eu economy with exible exchange rates in 1929 + gov boosted aggregate demand during depression + CB acted as lender of last resort Portugal and Greece had mild recession and no banking crisis ITA and POL remained in GS until mid 1930s, which led to a severe depression + banks exposed to poorly performing loans to industry and agriculture + banking crises avoided by direct government intervention (both the countries had authoritarian governments) JAPAN= restored GS after impo de ation and it was unable to maintain parity during depression, left GS after 1931 ARGENTINA= rst country in depression and left GS in 1929. Recovered in 1935 and avoided default on foreign debt AFRICA/ASIA= hurt by fall of global agricultural prices, especially exporters. Newborn Industries weren’t able to develop without foreign capital and colonies couldn’t afford independent monetary policies fi fl fl  DEGLOBALISATION There was a failure in international cooperation. Lausanne Conference on Reparations (06/1932) and World Economic Conference in London (06/1933) tired to nd a global solution ○ In Lausanne there was established that GER had to stop reparation payments during recession —> Conference was a failure Obstacles to global reparation were then reparations and war debts, since GER couldn’t pay and so EU countries couldn’t extinguish their debts with US From 1933 there were also the two new political obstacles of Roosevelt and Hitler, since their prioritised their nations’ growth over the international one BRITAIN= rebuilding competitiveness with a devaluation in 09/1931 and general tariff in 1932 (10% on all goods). ○ UK preferred to trade with the Sterling Bloc ○ Was free from the straightjacket of GS: BoE could lower interest rates and low cost of borrowing caused an housing boom in 1932-35 -> no real impact on industrial and so on employment ○ Unemployment eliminated by rearmament post 1937 after GER broke the Treaty of Versailles and rearmed GER & ITA+GER nazi alliance ○ There wasn’t a systematic anti-cyclical policy KEYNESIAN DOCTRINE= output and employment depend on aggregate demand. Demand had to be managed through the moderation of “boom and bust” cycle and scal & monetary policy should be anti-cyclical —> when in boom, aggregate demand should be decreased to avoid overheat and when in bust increased to avoid deep recession In addition, government spending has a multiplier effect: if gov spends 1B $ on the economy, aggregate demand will increase by 1.2B $, if multiplier is 1.2 Keynesian doctrine is dif cult to obtain —> dif cult to forecast a bust + time lag in policy implementation can make spending pro-cyclical + dif cult to force gov save during a boom period: leads to overheating British devaluation put pressure on countries exporting to UK and holding reserves in £ -> Scandinavia devalued when pound went off gold and JAP, BOL and VEN adopted sterling peg ( xed the value to the one of the sterling) fi fi fi fi  UK colonies and Half colonies automatically pegged to £. Dominions (no Canada) held reserves in £ and UK treasury helped other countries wanting to peg to build up suf cient £ reserves 07/1933 Commonwealth declared commitment to upholding sterling exchange rates, con rming the Sterling Area Commonwealth Conference (1932 Ottawa): preferred treatment of commonwealth goods in UK after imposition of the general tariff + preferential access of UK goods to CW and sterling area Share of sterling area in UK import/export increased by 14/11% in 11 years and there was a big shift towards dominions on both side of exchange, while trade with other major economies decreased along with world trade Exchange rate stability of £ in the Sterling Area allowed countries to stabilise their currencies and support recovery with cheap money From 1934 stable $-£ exchange rates freed most of global trade from volatility INDIA= was primary major exporter that was hit by falling raw material prices. As a British colony had to stay pegged to £ but worsening terms of trade called for devaluation against the pound —> tight monetary policy and scal austerity prevented Indian recovery LATAM= legacies of GD, where falling prices of primary exp forced early devaluation. Devaluation led to increased external debt + US capital exports to LATAM terminated —> forced defaults (defaulting on debt means that later no one will lend money to you) ○ As consequences, devaluation allowed CB to rise liquidity and the defaults on debts allowed gov to spend more and to promote domestic investment ○ IMPORT SUBSTITUTING INDUSTRIALISATION (ISI)= terms of trade shock made economic model based on primary exports and manufactured imports unsustainable -> high tariffs to protect home-grown industries but preferential tariffs on imported capital goods To maintain GS, Nazi GER and allies controlled exchange to limit capital movements, while FR and the Gold Bloc maintained GS in its original form until they could, via de ation and austerity ○ Gold Bloc: countries of 19th Latin Monetary union + Holland + POL + LIT + CZH. Was only a symbolic organisation, since CBs did not cooperated Long depression since gold ex.rates had to be kept by conserv. scal policy & high tariffs fl fi fi  FR & GOLD BLOC= had a sluggish recovery, since tariffs couldn’t avoid negative trade balance after 1933, falling prices (due to constraints of GS) and agg.dem reduced gov revenue and in ationary fear resulted from rising de cits ○ French “new deal”: Popular Front brought left wig parties to power in 1936 and increased public salaries and forced wage increases in private sector to boost consumption and end labour unrest —> end of de ation but no devaluation —> loss of gold reserves ○ Tripartite Agreement (1936): to stem out ow of gold, FR + UK + US stabilise currencies with realigned exchange rates. Was an informal provisional agreement (only a day-to-day exible cooperation btw treasuries and CBs) ◆ Full gold convertibility reinstated (NO GS!!) btw signatory nations + agreement to refrain from competitive devaluation btw nations (cooperation btw nations) ◆ FR accepted to devalue the franc against £ and $ and remaining Gold Bloc members also joined the Agreement ◆ Created exibility for currencies + stabilised exchange rates + currencies not pegged again to the gold standard!! fl fl fl fl fl fi  RISE OF THE STATE Hitler came to power in January 1933 and needed 1y to consolidate nazi party Lot of propaganda for the economic policy, but actions were the continuation of the decision of the previous gov —> moratorium on all reparations (already suspended) and public works programmes Introduced the Reichsmark Bloc: capital controls and clearing trade Fight against unemployment through the building of national highways and driving Jews and women to leave their employment FOUR YEAR PLAN (1936)= prepare GER for a new war. The new investment was allocated to heavy industry, unemployed males hired in heavy rms and the plan was nanced largely through de cit spending In July 1932, GER left the GS -> established exchange controls and decided that Reichsbank was the only one that could hold foreign-exchange reserves + foreign deposits were frozen Exchange controls: owners of gold or hard currency had to sell them to the Reichsbank, which conversed them into mark and increased the supply of money in GER (& became the monopoly of gold and foreign money) ○ Reichsbank limited also foreign exchange to importers, while exporters had to surrender foreign-exchange earnings to Reichsbank CB interest rate were reduced in summer of 1932 Central government nanced programmes for work creation THE NEW PLAN= Under the president of the Reichsbank Hjalmar Schacht —> introduced a national Autarchy with import restrictions and export subsidies to counteract impact of the overvalued Reichsmark and to riequilibrate trade balance + Extended Economic Space [to provide secure supply of raw materials and food during war] ○ BILATERAL TRADE AGREEMENTS: Private compensation procedure and Bilateral exchange clearing system By 1936, GER concluded clearing agree. With most countries in central & S-E EU fi fi fi  Bilateral Agreement: allows to import and export without using foreign exchange. Both countries agree on a target of import/export to avoid huge trade de cit or surplus. At the end of the year, the difference btw the trades of the nations is compensated to the de cit nation by the surplus one by the right amount GER exporters were not paid by the Italian buyers -> paid by German CB in Reichsmark. The same happened to the importers -> paid the right amount in Reichsmark to the CB and CB gave them the equivalent in lira [Same Process in ITA] By 1938, half of GER foreign trade was conducted through bilateral agreements There was a shift from UK and Gold Bloc towards S-E EU and from US to LATAM REICHSMARK BLOC= exporting to GER was pro table for EU periphery and it was also a strategic motive for GER, since export would have been secure reliable sources of necessary imports in time of war Shift away from hard currency bcs of lack of foreign exchange and high tariffs in US & FR ITA= 1931, after UK devaluation, Mussolini tried to de ate to offset the revaluation of lira ○ Introduced capital controls (1932) to stem out ow of gold reserves and in 1935, with Abyssinian campaign, gold exports were prohibited ○ Bilateral trading agreement made GER largest market, after the League of Nations imposed sanctions for the Abyssinian war ○ ITA signed clearing agreement with ARG and UK JAPAN= avoided depression bcs reinstated GS only in 1930 and left it in January 1932 ○ After leaving GS, yen depreciated by 60% and this promoted JAP exports and served as natural protection against imports ○ Invasion of China in 1932, extending an empire composed of primary exporting economies around JAP —> industry expanded due to military demand ○ Dual economy: heavy industries were very productive and with high wage economies, however the other industries (80% employment) were still stuck and unproductive US= 03/1933 Roosevelt declared bank holiday [suspended movement of money to prevent speculation in advance of the introduction of a new policy] during which he reshaped macroeconomic policy ○ GS abandoned in April 1933 and FED ended sterilisation ○ Division of commercial and investment banking was supported ○ Fed Deposit Insurance to avoid future bank runs fi fl fi  ○ Agricultural Adjustment Act: production restricted by a government decree to increase prices and provide same purchasing power of 1914 ○ National Industrial Recovery Act: manufacturing rms were encouraged to increase wages and expand employment by shortening the work week —> allowed to increase prices to balance the increased costs —> Not as effective as EU URSS= fastest growing economy in the world btw 1929 and 1937 ○ Economy almost completely ruled by government and was able to exclude itself from the crisis around EU ○ Exception of the worldwide trend of good growth in 1920s and bad in 1930s ○ Growth led by forced industrialisation: labour and resources were transferred from agriculture to manufacturing ○ There was a concentration of investment in modern industry: metals, machinery, chemicals and equipment ○ Industrialisation was nanced from expropriate farm surplus -> to control surplus, peasantry were forced into collective farms ○ Consumption was reduced to increase rate of investment and investment was primarily allocated in the heavy industry ○ Agriculture and light industry were targeted by modest plans, while for heavy industry (especially machinery) were drafted ambitious plans, which also established the level of production ○ Collectivisation implemented very rapidly and brutally: size of farms was optimum for mechanised production, but achievements were disappointingly poor: investment wasn’t suf cient for rapid mechanisations and peasants protested slaughtering livestock to avoid to give them to the State ◆ K/L in agriculture fell -> sharp fall in prod after 1930 -> mass famine in UKR and southern RUS -> even more farm animals were killed ○ Stalinism rst developmental dictatorship: police state, forced labour, 10m deaths during the Stalin’s terror [everyone who was against: labour camps/ killed/ deported] ○ There was also a militarisation of the economy, which hugely increased share of defence spending and share of war industries (over tot investment) —> URRS became largest munition manufacturer in the world! fi fi fi fi  EUROPE AFTER WWII Problems: economics of WWII, post war reconstructions, EU recovery with Marshall plan WWII= con ict in EU area (1939-1945) and in Asian-paci c area (1937-1945). Aggressors [GER, ITA, JAP] vs the victors of Allied Powers [FR, UK, US, URSS, CHI] ○ Worst of all wars -> largest armed con ict in history and only truly global war ○ Industrial warfare bcs manpower became secondary to repower + military outcomes depended on industrial potential ○ Was the most destructive: extensive battlefronts, huge destruction behind enemy lines (areal bombing), civilian deaths equal or higher than military ones, genocide, ethno-religious cleansing ◆ 60M deaths —> 40M in EU, 26M in URSS. Most in Eastern EU and east Asia and there were result of extermination more than collateral damage (Holocaust: 6M) ◆ Military deaths concentrated on two fronts and more in URSS, CH, GER, JAP ○ Total mobilisation for war: conversion to produce weapons and munition + concentration of industry to push mass production ○ Economics aimed to destroy enemy’s economic potential (submarine/ bombing) ○ Technological progress with mass production method, advancement in motors, aerospace + spillovers in science (computers, nuclear energy…) ○ INTER-ALLIED AID= US transferred food/munitions to UK and URSS and imported from non combactant allies on credit ○ Division of labour: rich countries specialised on war material, while poor countries provided manpower ○ There was the exploitation of occupied lands —> GER and JAP extracted food and raw materials, and GER increased trade with allies during war The economic consequences of war were: physical destruction (with huge variation across countries and with most damage in civilian infrastructure), population loss (which made human capital losses bigger and post war resettlements made impact of war more uneven), trade disruption with changes in borders and national self-suf ciency Geopolitical consequences: collapse of Empires (WW moved by colonial ambition, but after them decolonisation was fastened), industrialisation of periphery, colonial and post- colonial wars, new balance of power (superpowers and Cold War) fl fl  In western EU, industrial production capacity was as large or larger than pre war + postwar resettlements offset wartime population losses —> strong foundations for the rebirth after WWII ○ Allowed by the fact that attacks and bombing was primarily on city centres and not on the peripheries (where industries were located) War damaged social and economic system —> wartime controls were maintained to avoid in ation and unrest, economic elites that collaborated with Nazi were attacked by populists, domestic/international payment systems ground to a halt Wartime led to destruction of railways and key point in infrastructure. Equipment for railways was lost and major waterways were blocked by wreckage Destruction of residential housing and urban infrastructure + cities often cut off by transport bottlenecks Stock of industrial equipment grew during war, and power generating capacity was larger than in pre-war —> after war industrial production collapsed (by 20% GER and ITA) Reconstruction priorities were transport ways, while industrial capacity was repaired with American imports of machinery and assistance. Also reconstruction of bottlenecks Reconstruction and economic revival was seen as a national effort, supported by political consensus and by trade unions (until 1948) There was a swing to the Left: ○ UK= Labour Party came to power in 1945, intro welfare state but maintained warlike mobilisation ○ FR= socialist and communists gave priority to reconstruction over concessions to the working class ○ ITA= elite workers to encourage work intensity The focus on industrial revival created an uneven recovery in agricultural sector GER= total defeat and total destruction by bombs of Allies on railways and cities, while public utilities and communication lines became ineffective ○ GER was divided into occupation zones and trade/transfer of resource btw the zones was reduced to the bare minimum ○ Potsdam Agreement: demanded reparations from GER to be met by dismantling industrial plant and equipment ○ 1946 Level of Industry Plan reduced by half industrial production fl  Limits of recovery: ○ COMMAND ECONOMY= there still were wartime controls ( xed prices and rationing) to avoid in ation or shortages ◆ Wage control to avoid competition for workers and to allocate labour to high priority industries ◆ Regulated bank lending to support industrial and public investment ◆ Under controls, rms no incentive to increase production or productivity ◆ Market transactions replaced by compensation deals and wages had to be complemented by provisions in kind ◆ The reluctance to liberalise was driven by deep distrust of markets ○ DOLLAR SHORTAGE= the economic strategy was that investment-led growth required the enhanced production of capital good and/or machinery imports ◆ However, GER steel and machinery production was insuf cient for cap.goods D ◆ EU depleted hard currency reserves during war, so it could not import cap.goods from UK or US ◆ Imports needed to be paid by exports, but industrial prod needed to be raised ◆ So, EU economy could NOT revive without GER ○ POLITICAL UNCERTAINTY= new politics with socialist, communists and labour governments ◆ In GER, until 1947 Social Democrats were largest party in control of Econ Admin., while the centre-right was dominated by Christian Socialism ◆ Uncertainty about future limited investment, while uncertainty about future prices and wage controls limited investment in skills and training MARSHALL PLAN= it was the European Recovery Programme (1948-52) —> 13B $ of US government aid to EU countries in exchange for trade liberalisation and economic cooperation. ○ Technical Assistance Program to improve industrial productivity ○ The motives of US aid: remove external constraints to EU recovery, expand market for US industry after demobilisation, contains soviet expansion in EU 1. Dollar aid to buy imports from US 2. Counterpart funds used to nance domestic investment 3. Intra-European cooperation (OEEC) fl fi fi  However, Marshall Aid eliminated EU trade de cit with the US Imported materials and machinery boosted industrial growth The counterpart funds provided additional resources to solve infrastructure and production bottlenecks The investment aid eased tension btw investment needs and welfare Marshall Aid was conditional on commitment to market economy —> imported food, fuel, raw materials eased shortages Political power to the centre: FR there was a coalition gov btw Republicans and Socialists, GER Christian Democrats take over economic administration, ITA Christian democrats win 1948 elections Communists were marginalised bcs accepting a Marshall Plan implied a commitment to capitalism and there was the refusal of URSS and Soviet bloc to partecipate GER= Marshall aid to FR and Benelux substituted GER for reparations ○ Revised Level of Industry Plan (1947): allowed for industrial expansion ○ Marshall Plan nalised division of GER Marshall Plan encouraged EU integration —> “United States of Europe”, where close economic and political relations would have made war unthinkable OEEC= Organisation for EU Economic Cooperation. EU integration was a way of reconciling FR and other countries to higher levels of GER industrial production and of disarming those who insisted on pastoralizing the German economy BIZONE= 1947 UK + US areas in GER to rebuild internal trade and production -> GER economic normalisation was though by UK and US even before Marshall Plan fi fi  POST WAR GROWTH GOLDEN AGE (1950-1973): growth acceleration in industrialised nations and there was convergence in income and productivity SLOWDOWN/ NORMALISATION (1974-1989): growth deceleration and convergence continued GLOBALISATION AND NEW ECONOMY (1990s- present): renewed divergence btw EU and US and decline in global inequality (Rise of the Rest) During Golden Age there were convergences btw countries (convergence club) but was only btw Western nations, not with the rest of the world There was a macroeconomic stability with high investment, no unemployment and moderate wage growth (not growing faster than productivity!). There was also low in ation and stable exchange rates Social equality also increased, since welfare state eliminated mass poverty, full employment reduced income inequality and women at work reduced gender inequality RECONSTRUCTION THESIS= war-shattered economies automatically recover to their normal growth path after major calamities ○ This bcs wartime destruction raised marginal productivity of capital -> K/L decreases ○ War misallocated resources, that after war can x with allocation of labour and capital to restore ef ciency Countries with largest output gaps after WWII recorded the highest growth rates during the Golden Age Why did post war growth lead to convergence? Can also be seen: lower k are developing countries, while higher k the developed western countries Constant return to scale: if increase by 10% labour and capital, production increases by 10% as well fi fi 1. CATCH UP= rapid growth achieved by reversing the loss of output and destruction of capacity caused by WWII 2. CONVERGENCE= additional growth achieved by closing the ef ciency gap that had opened up with US At the beginning the rapid growth of Golden Age, especially for EU, represented a return to normality after WWII By 1948 EU reached production levels of US (considering even GER) There are some controversial things, like the neutrality of technology -> modern technology favoured resource abundant + capital intensive economies with large markets Btw 1913 ad 1950, EU lacked resources to invest in modern machinery, infrastructure and human capital —> protectionism limited the market size but by 1950 US established huge productivity lead US: early development of mass production + early in lead in technology intensive industry 1. Economies of scale: large internal market with relatively homogeneous demand 2. Technological innovation: gov promoted scienti c research and industrial R&D funded by large rms 3. Education: enrolment in post primary education was the highest in 20th century Higher per capita income —> higher propensity to invest long term After WWII, there was a technology transfer: ○ Rapid growth of international trade (embodied technology) ○ EU strength in technical education through adaption and learning ○ Marshall Plan and the Technical Assistance Program Growth of labour supply: population resettlements and colonial repatriation + rise female labour + mechanisation reduced demand for farm labour Flexible labour supply held back wages growth despite the high productivity growth until the end of 1950s fi fi  US productivity before Golden Age was far above UE and JAP ones, but then during the Golden Age EU and JAP triplicated not bcs US slowed down but because the other two were converging! Both convergence and catch up in uenced the rate of investment: fast accumulation of capital and high returns of capital ○ Accelerator principle based on the propensity to invest, which depends on expected pro ts, which depends on: expected future product demand + relative price of complementary factors of production (L) ○ Investment also positively in uenced by: trade openness and wage moderation [wages not allowed to grow faster than productivity] Eichengreen sustained that economic growth is conditioned by a social contract btw rms and workers on how to redistribute pro ts ○ In the dynamic game theory, the contract is undermined by the time inconsistency of optimal plans —> workers have no incentive in supporting wage moderation if not certain that rms reinvest pro ts, while rms have no incentive in reinvesting pro t if not sure that unions accept wages moderation After WWII, gov were strong enough to force social partners (party and unions) not to break the social contract: high investment -> fast productivity -> low wages eq. Social contract could fail, since some countries at full employment and with militant craft unions experienced severe waged pressure + strikes (FR, ITA, UK) Compliance must be monitored to be enforced!!! Firm compliance was the key: reconstruction nanced by initial wage restraint External vs internal monitoring To make social contract work, social partners must be locked in the bargain. On enforcement mechanism were bonds created to push reneging (AU, GER, SW) There was also the enforcement mechanism of devices to bond labour (welfare bene ts conditional upon social contract, shortening of workweek to compensate wage restraint) To make social contract effective, bargaining must be coordinated across different sectors Externality: wage restraint in one sector might affect investment and thus further wage growth in other sectors Internalise it through: (1) national level bargaining btw umbrella organisations Umbrella organisations: trade unions, chambers of commerce, institutions… (2) government-mediated bargaining at industry level fi fi fi fl fl fi fi fi  What was the impact of WWII? ○ CLEAN SLATE= theorised by Olson. Stable democracies accumulate “distributional coalitions” and policymakers become captive of special interest groups -> Stable democracies tend to accumulate powerful special interest groups that prioritize their own bene ts over societal welfare, leading to economic inef ciency, policy stagnation, and diminished government responsiveness. ◆ Clean State because the fast economic growth can only come after the disruption of the previous State (cleaning it) like through war ◆ In GER or JAP dictatorships dismantled these coalitions. Post war interest groups were more encompassing and more publicly controlled ○ PATH DEPENDENCY= theorised by Eichengreen. Post war institutional reforms were nuanced. Even small changes depended on special historical circumstances -> Post- war institutional reforms were often shaped by speci c historical contexts, with even minor changes in uenced by unique social, political, and economic factors of the time. Is the opposite of the theory of the Clean State ◆ GER: corporatist model developed from 19th century ◆ UK: gov were unable to dismantle craft trade unions, which were too speci c and so the social contract failed fi fl fi  POSTWAR INSTITUTIONS EU growth was the re ection of both post war catch up and convergence Both promised high returns on capital, but realise these required high levels of investment Accelerator Principle: propensity to invest depends on expected pro ts which depend on: 1. Expected future product demand 2. Relative price of complementary factors of production (L) Role of institutions was wage moderation and trade openness During Golden Age, exports in W-EU grew 9% and by 1960 reached levels of 1913 —> trade expansion was driven by intra-industry trade EUROPEAN PAYMENTS UNION (1950-1958) = organised by participants of the Marshall Plan, which also provided the working capital for EU. Used the clearing mechanism created by the OEEC —> member states could draw credit from EPU to nance temporary de cits, but drawing rights were linked to trade liberalisation ○ European Economic Community (1958) [origin of the European Union] ○ European Free Trade Association (1960) German dilemma: industrial based on steel and machinery needed to be limited to reduce war potential (Morgenthau Plan), BUT German capital goods exports were essential for European recovery ○ There was established an international control of the Ruhr —> production of strategic goods limited under allies + forced exports of coal, coke and steel products as reparations ○ European Coal and Steel Community: was the solution to German dilemma after GER independence in 1949. Idea of GER and FR —> creation of common market [no tariff barriers & common market regulation & custom market] for coal, coke, iron ore and primary metals + supernational authorities had to monitor and enforce compliance ◆ ECSC very impo for its innovation in organisation New international order was based on previous mistakes, like post WWI vendicative claims and the macroeconomics policy during Great Depression New western approach: wise and generous post war settlements, active international leadership of US, trade liberalisation and coop, new international monetary policy fi fl  Bretton Woods Conference in 1944 planned post WWII order, designing new monetary system based on xed exchange rates + establishment of IBRD, IMF and ITO The policy objectives, given to the institutions: 1. Monetary stability and prevention of competitive devaluation (Inter. Monetary Fund) 2. Reconstruction of European economies (Inter. Bank 4 Reconstruction & Development) 3. Reduction of trade barrier and prevent return of protectionism (ITO or GATT) WTO no Bretton Woods institution but replaced GATT!!! US had huge amount of gold, so US dollar was xed to gold (backed up by reserves) —> other currencies pegged to dollar at xed exchange rates (if any problem, exchange rates could be realigned but with US permission and through IMF) Independent monetary policy regained in combination in xed exchange by intro of capital controls and CB not allowed to monetise gov debt EPU fundamental for European monetary policy: devaluation for currencies that pegged to $ in 1949. Trade surplus needed with US in EU nations bcs needed to gather reserves of dollar to make currencies freely convertible again. There was, then, a full convertibility in 1958 Trade liberalisation was gradual: in Geneva (1947) there was a 20% tariff reduction but there were other more 6 rounds to reduce them ○ Through policies of reduction, should be applied the “Most Favoured Nation Status”: if one country in Bretton Woods decreases tariffs, all others have to do ○ Domestic and foreign manufactures must be subjected to same standards ○ Prohibition of dumping (export under production costs) ○ Prohibition of quotas (except in balance-of-payment crises) ○ infant industry protection allowed for developed counties Growth of GDP in EU decreased from 1950-73 to 1974 and 1990 (3.7 -> 1.4) Growth of labour productivity also slowed but EU and US convergence continued + productivity growth was faster than any time before WWII What were the problems? 1. Capital accumulation and technological catch-up reached limits 2. Contribution of human capital became relatively more impo The post 1973 slowdown was due to exhaustion of the following post war potentials: (1) high ROI / (2) reconstruction growth / (3) ef ciency gains for market integ & struct ch fi fi fi fi  INSTITUTIONAL SCLEROSIS= economy became over regulated, post WWII social contract broke down -> State called to act bcs of exhaustion of motors of rapid growth ○ Olson’s Theory (1982): stable democracies experience slow growth due to underhindered growth of distributional coalitions + State institutions and policymakers become captives of special interest ○ Growth slowed down also for in exible institutions (gov policies, labour laws…), as their special interest prevented much needed economic reforms ◆ trade unions prevented real wage adjustment, while maintaining their efforts to shorten working week —> low investment -> high wage equilibrium ◆ Loss of competitiveness vs East Asia ◆ Industry lobbyists acquired subsidies and prevented structural change Failure of Bretton Woods bcs the whole system hinged too heavily to US $: FED could not print too much money to keep gold rate at same level & the Vietnam War affected the power of the $, along with high public investment FED could no longer support gold convertibility: Floating 1971 with Nixon and 1973 Articles of Agreement. were amended to allow exible exchange rates After B-W: FLOATING OIL SHOCKS= sluggish demand as rising commodity prices slowed down real wage growth. Arab League retailed against western support for Israel in the 4 Arab-Israeli war ○ Creation of OPEC: international cartel of oil-exporting nations ○ Oil necessity without substitutes -> low price elasticity of demand -> dramatic rise of prices that reduced purchasing power -> lower aggregate demand reduced demand for labour ○ Led to Stag ation: rising commodity prices raised general price level (in ation) and aggregate demand fell (stagnation) —> in ation coexisted with high unemployment!!! To stop high in ation, western CB raised i: Oil Cartel ○ Crowding out domestic investment reduced a.d ○ High i attracted money from oil-rich states, which 2 Caused further in ation or exch.rate appreciation Falling domestic D and weak competitiveness led to: ○ Structural unemployment and weaker utilisation of K and L slowed TFP growth fl fl fl fl fl fl  RISE OF THE REST Until mid 20th century modern economy growth characterised only EU and West + JAP From 1960s stop of Great Divergence with the new middle-income economies emerging NEWLY INDUSTRIALISED COUNTRIES (NICs)= 1965 NICs produced 5% of world manufacturing products, but by 1995 increased to 17% (and since them it doubled) ○ Korea, Taiwan, Singapore and Hong Kong entered the club of advanced economies Ones that were not NICs remained the primary exporters -> mixed performance exogenously determined by commodity prices (UAE with oil…) Peripheral economies could perform economic development only after they freed themselves from the Western economies and control —> only after WWII bcs lot of them remained colonies of the western empires Major problem was creating an industry that could compete with the west. In most of the cases the products were sold in the domestic market and protected from foreign products by tariffs —> domestic market should have been suf ciently big, and so countries should have been bigger enough, demographically speaking Role of the State was also fundamental — DRIVERS OF LATE INDUSTRIALISATION — DEMOGRAPHIC TRANSITION= mortality declined through public health measures, better nutrition and reduction in child mortality + fertility declined (higher infant surivival expectations and fertility control) ○ Btw stage of high death rate/ high birth rate and low death rate/ low fertility, there were two periods where: rst death fell before birth (Malthusian) and then birth rate fell with the rise of incomes (post-Malthusian) ○ From data, it is noticeable how periphery countries (CHI, IND) had a population boom from the end of the WWII and 1995: higher than western nations, if compared ○ The population boom helped the labour need, avoiding “ ghts” btw industries for the lack of labour IMPORT SUBSTITUTION= birth of the Import Substitution Industry thanks to WWs and population growth. Was possible only with a previous experience in manufacturing: pre- modern (CHI, IND, M-EAST), emigre (LATAM) and colonial (E/SE ASIA, which were experts in food and primary elements) fi fi  ○ The limitations of ISI were the limited market sizes (due economy of scale) and the limited exposure to advanced markets (which were technologically more developed and being far from them didn’t allow to these countries to develop further technology) ○ NEW GROWTH THEORY: diminishing returns to capital accumulation + constant returns to scale + technology is exogenously determined and factor neutral ◆ However, Romer said that technology is endogenous: innovation is a product of the economy and requires inputs (human capital). Technology is basically a sum of non-rivalrous ideas —> technology is endogenous bcs depends on human capital [ideas] (divergence btw countries more likely than convergence) ◆ Acemoglu said that returns to scale are increasing: endogenous innovation depends on market size. Innovation driven by large advanced economies bcs technology follows capital and skill, which can’t be found in poor countries [not enough money to invest in human capital] DEVELOPMENTAL STATE= the challenge of late industrialisation were the inappropriate factor endowments (low capital and human capital) and insuf cient technology and technical capabilities. Was needed a substitute for this lacks, which was the State! ○ State needed to promote the export of the country ○ Different solutions: (1) Cost reduction, (2) subsidised learning, (3) building better institutions ○ Chart explains the problem of late Industrialisation ○ Contra intuitive: production is higher In D than in B bcs is L/Y ○ To be competitive: lower wages wrt Industrialised countries OR rise productiv. ○ [A -> B or A -> C] ○ Periphery at the beginning reduced costs, then became competitive in the market. Was the State that had the power to lower costs ○ A -> C was the Subsidised Learning, which was not implemented bcs was dif cult to obtain: industrialisation required knowledge based assets (production / project execution and innovation capabilities) —> dif cult to obtain or generate and the lack of them constitutes barriers to entry fi  ○ PRODUCT CYCLE: the theory sustains that new industries locate in high wage economies —> human capital need to develop new technology and products and needed high returns to innovation in advanced markets. ◆ As technology is standardised, comparative advantage shifts and industry migrates to lower wage economies ◆ As wages rise in NICs, cost of production rises and so they become less competitive than low wages economies -> must become more innovative to remain in the market ◆ Limitation was that institutions suited to competing in established technologies are dif cult to adapt to competing new industries ○ JAP: in the interwar period, exported cotton textiles exploiting imported technologies and low wages (low-tech) / growth in shipbuilding, then cars and consumer electronics (mid-tech) / 1980s attained technological leadership in engineering, combining customised production with scale (high-tech) ○ NICs: second wave of Asian countries to take off were South Corea, Taiwan, Hong Kong and Singapore —> growth from 60s as Japanese wages became too high for low tech, but growth slowed down in 90s even if it continued to outpace West Global Trade boom since 1990: transport and communication technology + reduced trade barriers (WTO) + end of Cold War Capital ows with integrated capital markets, deregulation and nancial innovation and multinationals Trade oriented rms became global -> trade within the rm and specialisation within product chain Traded goods are produced globally: manufactures with many components, low trade costs mean that rms can outsource, cheap and fast communication allowed rms to import service components Multinationals had comparative advantages of countries exploited within the rm and transfer of capital and pro ts within the rm (which hedged them against risk) fi fl fi fi fi fi  NEW AGE OF GLOBALISATION New global trade boom from 1990: new transport and communication technology, reduced trade barriers thanks to WTO, end of the Cold War Capital ows take a different form through integrated capital markets and multinationals. Were introduced also deregulation actions and nancial innovation Trade-oriented rms became global and specialisation with product-chain NEW ECONOMY: ICT revolution transformed production and trade, where production became much more skill and R&D intensive. The service part of production gained importance and exibility + institution gained exibility, which was essential for innovation (with startups) Convergence EU-US stopped in 1990 when US started diverging and EU falling behind it: ○ EU became more strictly regulated than US, especially for labour market —> bad for the diffusion of the ICT technologies ○ Production became more skilled and labour intensive, so skilled people were required and US had higher education levels ○ Excessive taxation ○ Barriers to trade in services within the Single Market (union of markets) US workers worked much more hours than EU -> in EU leisure is a super valuable commodity. However, in the GDP x HourWorked is not considered, so is different to compare them as a unit of measure Institutions and their regulation do not slow down the growth (See Golden Age) and EU and US are pretty similar in global comparison GDP per capita: continued convergence FR leader of productivity (since of high GDP per HoursWorked: convergence was much faster and EU unemployment) reached US, even though now it has being new divergence Since 1970 ITA and GER very similar Hours per capita: beginning EU worked more, then union became UK much smaller labour productivity stronger and drove down length of work week -> EU = US in hours worked BUT from 1990 US worked more fl fl fi fl fi  If we have to disregard US-EU gap in GDP per capita: ○ 1/3 due to difference in labour participation -> unemployment, low rate among women for child-care bene ts and regulations, low rate among elderly thanks to universal pension system ○ 1/3 due to difference in av hours worked ○ 1/3 due to productivity gap (per worker hour) -> labour allocation, capital intensity and ef ciency [maybe ICT] There was a sharp decline in labour input in EU, while there was an expansion in US and Asia —> Europeans work too little? Employed labour force is very productive + unemployed ones are mostly marginal workers (workers that have much lower productivity than the average of the industry) + leisure is highly valuable commodity bcs leads to Investment!! (Hobbies…) ○ High unemployment is due to high labour market regulations (minimum wage requirement, work hours demanded…) and in some countries is structural unemployment, so focussed on speci c declining sectors (too gov subsidised sectors or heavy fatigue sectors like agriculture) Why do Europeans work less? 1. MIT SCHOOL THEORY= EU value leisure over extra pay than US and the preference for shorter hours are accepted by political establishment 2. MINNESOTA SCHOOL THEORY= lower US taxes implies higher incentives to work, there is a 10% gap in av tax burden btw US and EU —> excessive tax burden makes people prefer leisure The empirical evidence says that there’s weak correlation within EU and over time + does not explain the long term unemployment Unemployment mostly structural and has a limited occupational mobility relative to US LONG TERM UNEMPLOYMENT= workers that are unemployed for many years remain usually unemployed, and being out of the employed market for a lot of times depreciates the human capital! (“De-learning by not doing”) YOUTH UNEMPLOYMENT= new phenomenon but very important in EU. Btw 18-25y who are neither in job nor in a higher education. Large differences within nations of EU ○ Typically or jobs that are youths can do without a degree or jobs that are paid too low for the amount of work required fi fi fi  How to reduce unemployment? ○ NETHERLANDS: new contract btw trade unions and gov (Wassenaar Agreement in 1982) that froze minimum wage to help the recovery + devaluation the guilder when $ became strong for oil + structural reforms (part time work for women and youngs, cut the unemployment subsidy) ○ IRELAND: wage moderation in exchange for tax cuts + successive devaluation + return migration from the US (young and educated) ○ GER-AUSTRIA: youth unemployment not very a problem thanks to the dual-track educational system [program that combines classroom education with many hours in practice at work] + subsidies for low cost employment and regional mobility KLEMS= Kapital + Labour services (in hours) + Education + Material inputs (raw and intermediate) + Service inputs ○ Cross-country project on industry-level growth accounts ○ Disaggregation -> industry contributions to aggregate productivity growth and structural components (like labour reallocation) US productivity surge: the labour-productivity gap is driven by market services (distributive, nancial, business and personal services), in EU deindustrialisation slowed down productivity growth, while in US generated productivity surge -> drivers were the increased capital intensity and skill use, the rapid diffusion of ICT technologies, the potential spill-overs to innovation within the rm Productivity gap creates potential for catch-up growth: scope for factor accumulation, economies of scale, delayed diffusion of ICT. However, institutions must change (barriers to trade in services and nancial innovation like venture capital) ○ There are by the way some natural limits, like linguistic and cultural heterogeneity in EU + predominance of family business + limited labour mobility EU more competitive than US in world markets, due to better vocational training, lower labor costs in some regions and natural endowments (tourism) Inequality and poverty lower than US and rise slower + socio-public security higher + EU leads in HDI and happiness index Eastern enlargement: source of low cost/high skill labour but high risk of institutional erosion fi fi fi